Market Turning Points

PAUSE NEARLY OVER

Precision timing
for all time frames through a 3-dimensional approach to technical
analysis: Cycles - Breadth - P&F and Fibonacci price projections

"By the Law of Periodical Repetition, everything which has
happened once must happen again, and again, and again -- and not capriciously,
but at regular periods, and each thing in its own period, not another's,
and each obeying its own law... The same Nature which delights in periodical
repetition in the sky is the Nature which orders the affairs of the earth.
Let us not underrate the value of that hint." ~ Mark Twain

Current Position of the Market

SPX: Very Long-term trend - The very-long-term cycles are down and,
if they make their lows when expected, there will be another steep and prolonged
decline into 2014.

SPX: Intermediate trend - After a pause, the intermediate uptrend is
almost ready to resume.

Analysis of the short-term trend is done on a daily basis with the
help of hourly charts. It is an important adjunct to the analysis of daily
and weekly charts which discusses the course of longer market trends.

Daily
market analysis of the short term trend is reserved for subscribers. If you
would like to sign up for a FREE 4-week trial period of daily comments, please
let me know at ajg@cybertrails.com.

Market Overview

The market pause predicted in the last newsletter is now a week long. After
meeting its 1265-1270 projection, the SPX only had a brief two-day pull-back
of about 20 points before it rallied. The consolidation extended into Friday
with some minor selling at the close. Next week, the index should attempt
to extend its uptrend into the third week of January and reach the next P&F
target of 1278 or 1293.

This should be followed by some additional corrective action, but how much
is not clear at this time. Some Elliott Wave theorists believe that the uptrend
from 1075 is a minor wave 2 giving way, when complete, to a very sharp decline
as wave 3 unfolds. After the correction from May to October, I thought that
there was a good possibility that we might have started a bear market. Since
then, I have become more skeptical of that scenario for a number or reasons,
some of which I have already mentioned. The long term cycles which are scheduled
to make their lows in 2014 certainly are a strong argument for a nasty decline
into that time slot. However, the timing for the beginning of a significant
wave 3 decline at this time does not feel right.

The behavior of some confirming indicators also argue against it. For instance,
the VIX is not warning of a major downtrend in the market. And bond indices
-- which normally move inversely to stocks -- appear to be in the process
of forming an intermediate top.

We will analyze these two contrary indicators toward the end of this letter
as well as the dollar ETF: UUP. That third one is a little more difficult
to fathom, especially since the dollar (currently at 80.17) has created a
Point & Figure base which is capable of sending it to about 90, but this
is not necessarily something that would have to take place over the short
term.

These apparent contradictions do not guarantee that we will not start a wave
3 in the next few weeks, but they argue against it. We'll have to wait for
the market to clarify its intentions. Let's look at some charts!

Chart analysis

The Daily Chart of the SPX illustrates how insignificant last week's
correction was. Here, it looks like it is undergoing a minor consolidation
after challenging the previous short-term top and the downtrend line from
1356, before it is ready to push beyond these obstacles to a new near-term
high.

A couple of technical factors support this outlook. First, the P&F chart
gives us a projection for this move to at least 1278, and perhaps to 1293.
P&F projections have a strong history of being met before a reversal occurs.
Second, negative divergence normally develops in one or more of the indicators
before the end of a trend. This has yet to happen.

The MSO has reached an overbought condition giving us a warning that we are
getting close, but this index can remain overbought for an extended time (as
we can see at the previous top) and there are indications that this could
happen again this time.

Let's now look at the Hourly Chart. We'll see that it confirms the
analysis of the daily chart and that there is still no sign of a top!

The short-term uptrend from 1203 is delineated by channel lines. After becoming
near-term overbought, the SPX entered a consolidation which just broke out
of its light-green channel and is now traveling within a larger (chartreuse)
channel. Even if it broke out of it before resuming its uptrend, it would
not be a serious matter unless it made a new near-term low by dropping below
the red horizontal line, followed by moving below its 200-hr MA. Should this
happen, we could start being concerned that a short-term reversal had taken
place.

This is not likely. The index has already breached its long-term downtrend
line from 1356 and made a new short-term high. When it did, it was very over-extended
and is now undergoing a normal consolidation before making a second attempt
which will probably be successful.

Cycles

A minor cycle is due in the middle of the month, and another one towards the
end of the month.

Breadth

The Summation Index (courtesy StockCharts.com) remains positive and continues
to move up, but it is obviously telling us that the rally's momentum has waned
and that serious negative divergence is forming. Adding this cautionary sign
to the chart analysis above, we can conclude that a short-term top is not
very far off.

Sentiment

The SentimenTrader (courtesy of same) long-term indicator has gotten
a trifle more negative, but not yet enough to signal a big downturn in the
market.

The VIX

I am going to keep showing the Weekly Chart of the VIX because it is
one of the best indicators for forecasting future market trends.

The following chart is a compact illustration of the bull market which started
in March 2009. Each up move started with negative divergence showing in the
VIX vs. the SPX, and it did not end until positive divergence developed in
the VIX indicators.

I have marked the beginning of each uptrend in the SPX with a green vertical
bar and the end of each move with a red bar. Let's start our analysis with
the early March 2009 period, at a time when the SPX was approaching the end
of a vicious bear market. What was the VIX doing then? It was making a much
lower top, resulting in strong negative divergence and sending a clear signal
that the bear market in equities was coming to an end. It then kept on dropping
for many months until, finally, its indicators started to show positive divergence,
a sign that the SPX uptrend was ending. That phase of the bull market took
14 months to complete.

The same pattern was repeated in phase II of the bull market, and that lasted
9-12 months (to first and second tops). It started with negative divergence
in the VIX on 7/04/10, and ended with positive divergence in its indicators
which marked a top in the SPX on 5/01/11, and a second top on 7/03.

A third pattern, similar to the other two, appears to have started on 10/2,
when the first divergence occurred in the VIX. Another even stronger divergence
formation took place on 11/27. Both of these resulted in the beginning of
a rally in the SPX, marking what I am calling "bull market phase III".

Now let's fast forward to last Friday which was 3 months from the time the
first negative divergence appeared in the VIX, and let's compare the current
patterns of the index and of the indicators to the previous phases. Does it
look as if the present patterns are indicative of a stock market top? The
answer is obviously No! Therefore, we can probably safely conclude that equity
indices will continue to rise until the VIX and its indicators signal the
end of the present "bull market phase III".

BONDS (TLT)

Let's now take a look at the Weekly Chart of TLT. This will be a much
simpler analysis than the one I did on VIX. After re-testing its low of April
2010, TLT created a base which I have marked on the chart with a green horizontal
bar. That base took about eight months to complete and, on the P&F chart,
produced a target of 124 for the next uptrend. In fact, the index reached
125.03 on 10/02, and immediately had a sharp correction of almost 15 points
while the SPX had a strong rally.

Since then, it has retraced most of its decline and touched 124 one more time
on 12/19 in an apparent test of its former high. If this is
the case, TLT could be making a large distribution top which, if a convincing
sell signal is given, could result in a decline down to a minimum of 110,
and perhaps even 104. The indicators, which are both showing negative divergence
(with the MSO ready to go negative) may be warning us that this sell signal
could materialize at any time.

Considering the fact that VIX is not seeing an imminent top for equities,
if TLT were to give a sell signal in the near future, it would be a confirmation
of what VIX is saying.

UUP (Dollar ETF)

Our third contrary indicator is stronger than the other two, and may not be
of any help in signaling a continuation of the rally in equities. The MSO
is overbought and could be warning of a coming correction, but the MACD is
still strong and moving up. However, the index is up against some resistance
and may need to pull-back before moving through.

The daily indicators are much more bearish and are clearly signaling the beginning
of a short-term downtrend, so we may get some help from this index after all
in confirming the bullish signs (for equities) which are being given by the
VIX.

Summary

The SPX is just about ready to continue its uptrend with an objective of 1278,
and perhaps 1293.

After reaching its target, the index should go into another corrective period
of undetermined length. However, considering the position of the VIX, the
odds that we are ready to resume the bear market appear to be slim.

Based on cycles, the next two weeks should be bullish. After that, we may
have to wait until the end of the month before we get more clarity about the
future trend.

I want to wish
a happy, healthy and prosperous new year
to all my readers and subscribers

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The above comments about the financial markets are based purely on what I
consider to be sound technical analysis principles uncompromised by fundamental
considerations. They represent my own opinion and are not meant to be construed
as trading or investment advice, but are offered as an analytical point of
view which might be of interest to those who follow stock market cycles and
technical analysis.